The US debt burden has been thrust into the spotlight - and it's an ongoing point of concern.
Sam Dickie from Fisher Funds explains why this is happening.
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Speaker 1 (00:00):
Sam Dickey for your funds with me. Now, Hey Sam, Heather,
we're going, oh mate, very well. We've got to talk
about this US debt burden because this has been getting
a lot of attention at the moment.
Speaker 2 (00:10):
What is going on? Where are we at with the
US debt burden?
Speaker 3 (00:14):
So they owe thirty six trillion dollars, it's about one
hundred thousand dollars per person, which is one hundred and
twenty five percent of GDP, and that compares to US
in Australia about fifty percent of GDP. But it's similar
to heavily indebted countries like It's Lee, Greece, France, and
even China. And it's in the spotlight right now because
one hundred and twenty five percent is around the peak
(00:36):
we saw post war, immediately post World War Two, when
the US had to borrow a lot to finance it's
war effort. And critically, US interest rates, especially those medium
term interest rates, are near their highs. So the thirty
year interest rates that at eighty year high and that
means annual interest payments on that debt pile are now
over one trillion dollars. Then, of course we have Trump's
(00:57):
big beautiful bell and those against it say, well, left
government debt by three to five trillion over the next decade.
Speaker 1 (01:03):
Somebody sent me a couple of charts on this today, Sam,
and it was remarkable to see how the debt had
kind of run along the ground for such a long
time and then all of a sudden you get this
enormous spike. Have they got just a problem with their
attitude towards debt there at the moment in the last
fifty sixty.
Speaker 3 (01:20):
Years, Well, yes, they've I think. I guess it was
basically in the eighties or post the eighties, and certainly
into the nineties when they became addicted to debt and
the green span put got put in place where we
were every time there was a slight problem, he'd cut
interest rates, stoke stoke propensity to borrow, and stoke growth.
(01:42):
So I do think not just the end, but I
think everyone around the world has got a little bit
of a problem and is slightly addicted to debt.
Speaker 1 (01:49):
Yeah, so what are the risks Some of the risks
are quite hot for or something.
Speaker 3 (01:54):
Well, yeah, I mean the worst case scenario, and I've
got to say, I think this is a very low
probability is we're knocking on the door of what some
people will call the debt doom loop. So that's that
self reinforcing cycle whereby that the debt burden reaches a
tipping point and that drives up the borrowing costs that
lenders would want. They'd want a higher risk premium, which
in turn drives up debt. And as the cost of
(02:15):
borrowing rises for the government, it would also rise for
individuals and businesses. That would drive down GDP growth and
therefore further inflate dead as a percentage of GDP. Now
that is quite a doomsday scenario. Before we get too excited,
a couple of things. Firstly, the US dollars of the
world reserve currency. They can print more dollars to ensure
they don't default. It's not that attractive either. But also
(02:39):
at the stage's GDP growth is higher than interest costs,
so we're nowhere near a doom loop. We should ellbrace
though hither I think for more of that political brinksmanship
you and I have talked about before, back in twenty
twenty three, when the government debt ceiling is close to
being breached, and that whole debate with Congress will come
up in August of this year, so watch out for
(02:59):
that extremely low probability but extremely high impact event if
it ever happened. How do they solve this, well, three ways,
faster growth, or fiscal discipline, or financial repression. So that's
keeping interest rates artificially low, so taking each one of
those in turn on faster growth. Of course, the maths
is simple. Accelerating GDP reduces debt divided by GDP, and
(03:23):
of course everyone wants faster growth, but the problem is
that usually comes with higher inflation and therefore higher interest rates.
Now there is some early early hope that AI can
drive productivity and economic growth while driving down prices we
shall see. On the austerity side or fiscal discipline, no one,
no one wants that from a political point of view,
(03:45):
and that's why it's often not used in the market.
Head hope that doge and it's promised to cut wastage
would be the first step in this austerity journey, but
obviously musks out on his ear and it seems like
those big savings are a pipe dream. Let's not forget, though,
that the US has driven down debt post World War Two,
which were of debt from around current levels one hundred
and twenty five percent of GDP to thirty percent. And
(04:07):
they also did it again in the nineteen eighties and
then Portugal, Italy Island, Greece and Spain. The pigs in
Europe had austerity forced upon them during the European financial crisis.
So this is absolutely doable.
Speaker 2 (04:20):
Okay, So what do investors need to think about when
they're thinking about.
Speaker 3 (04:22):
All this stuff. Well, that the good news is that
the riskers front and center really is and it's been
openly debated by investors and politicians. That's great news. It's
also good news that we learn post Liberation Day that
Trump doesn't care about stock prices, but he does react
to the bond market because a rise in interest rates
affects everyone. It's always true that politicians have said for
(04:45):
many years we all know what to do, but we
don't know how to do it and get re elected.
So we probably need to market, or more specifically, the
bond market and rising interest rates to force politicians hands.
So we should be watching this one pretty as always.
Speaker 2 (05:01):
Thank you so much, Sam, I really appreciate it that
Sam Dickey for your fun.
Speaker 3 (05:05):
For more from Hither Duplessy Allen Drive listen live to
news talks it'd be from four pm weekdays, or follow
the podcast on iHeartRadio
Sam Dickey for your funds with me. Now, Hey Sam, Heather,
we're going, oh mate, very well. We've got to talk
about this US debt burden because this has been getting
a lot of attention at the moment.
Speaker 2 (00:10):
What is going on? Where are we at with the
US debt burden?
Speaker 3 (00:14):
So they owe thirty six trillion dollars, it's about one
hundred thousand dollars per person, which is one hundred and
twenty five percent of GDP, and that compares to US
in Australia about fifty percent of GDP. But it's similar
to heavily indebted countries like It's Lee, Greece, France, and
even China. And it's in the spotlight right now because
one hundred and twenty five percent is around the peak
(00:36):
we saw post war, immediately post World War Two, when
the US had to borrow a lot to finance it's
war effort. And critically, US interest rates, especially those medium
term interest rates, are near their highs. So the thirty
year interest rates that at eighty year high and that
means annual interest payments on that debt pile are now
over one trillion dollars. Then, of course we have Trump's
(00:57):
big beautiful bell and those against it say, well, left
government debt by three to five trillion over the next decade.
Speaker 1 (01:03):
Somebody sent me a couple of charts on this today, Sam,
and it was remarkable to see how the debt had
kind of run along the ground for such a long
time and then all of a sudden you get this
enormous spike. Have they got just a problem with their
attitude towards debt there at the moment in the last
fifty sixty.
Speaker 3 (01:20):
Years, Well, yes, they've I think. I guess it was
basically in the eighties or post the eighties, and certainly
into the nineties when they became addicted to debt and
the green span put got put in place where we
were every time there was a slight problem, he'd cut
interest rates, stoke stoke propensity to borrow, and stoke growth.
(01:42):
So I do think not just the end, but I
think everyone around the world has got a little bit
of a problem and is slightly addicted to debt.
Speaker 1 (01:49):
Yeah, so what are the risks Some of the risks
are quite hot for or something.
Speaker 3 (01:54):
Well, yeah, I mean the worst case scenario, and I've
got to say, I think this is a very low
probability is we're knocking on the door of what some
people will call the debt doom loop. So that's that
self reinforcing cycle whereby that the debt burden reaches a
tipping point and that drives up the borrowing costs that
lenders would want. They'd want a higher risk premium, which
in turn drives up debt. And as the cost of
(02:15):
borrowing rises for the government, it would also rise for
individuals and businesses. That would drive down GDP growth and
therefore further inflate dead as a percentage of GDP. Now
that is quite a doomsday scenario. Before we get too excited,
a couple of things. Firstly, the US dollars of the
world reserve currency. They can print more dollars to ensure
they don't default. It's not that attractive either. But also
(02:39):
at the stage's GDP growth is higher than interest costs,
so we're nowhere near a doom loop. We should ellbrace
though hither I think for more of that political brinksmanship
you and I have talked about before, back in twenty
twenty three, when the government debt ceiling is close to
being breached, and that whole debate with Congress will come
up in August of this year, so watch out for
(02:59):
that extremely low probability but extremely high impact event if
it ever happened. How do they solve this, well, three ways,
faster growth, or fiscal discipline, or financial repression. So that's
keeping interest rates artificially low, so taking each one of
those in turn on faster growth. Of course, the maths
is simple. Accelerating GDP reduces debt divided by GDP, and
(03:23):
of course everyone wants faster growth, but the problem is
that usually comes with higher inflation and therefore higher interest rates.
Now there is some early early hope that AI can
drive productivity and economic growth while driving down prices we
shall see. On the austerity side or fiscal discipline, no one,
no one wants that from a political point of view,
(03:45):
and that's why it's often not used in the market.
Head hope that doge and it's promised to cut wastage
would be the first step in this austerity journey, but
obviously musks out on his ear and it seems like
those big savings are a pipe dream. Let's not forget, though,
that the US has driven down debt post World War Two,
which were of debt from around current levels one hundred
and twenty five percent of GDP to thirty percent. And
(04:07):
they also did it again in the nineteen eighties and
then Portugal, Italy Island, Greece and Spain. The pigs in
Europe had austerity forced upon them during the European financial crisis.
So this is absolutely doable.
Speaker 2 (04:20):
Okay, So what do investors need to think about when
they're thinking about.
Speaker 3 (04:22):
All this stuff. Well, that the good news is that
the riskers front and center really is and it's been
openly debated by investors and politicians. That's great news. It's
also good news that we learn post Liberation Day that
Trump doesn't care about stock prices, but he does react
to the bond market because a rise in interest rates
affects everyone. It's always true that politicians have said for
(04:45):
many years we all know what to do, but we
don't know how to do it and get re elected.
So we probably need to market, or more specifically, the
bond market and rising interest rates to force politicians hands.
So we should be watching this one pretty as always.
Speaker 2 (05:01):
Thank you so much, Sam, I really appreciate it that
Sam Dickey for your fun.
Speaker 3 (05:05):
For more from Hither Duplessy Allen Drive listen live to
news talks it'd be from four pm weekdays, or follow
the podcast on iHeartRadio
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